Wall Street, January. 20th, 2009 — The unprecedented political history and ebullience that took place today in Washington could not stop a falling knife.  Change may be the promise of the new administration, but the U.S. financial sector only continued a nearly unbelievable hammering.  The jaw can only drop in "lock-step," as it were, with the bank stocks.  The movement is beyond nasty, but threatens to unhinge the entire liquidity model of the developed economies.

We first discussed the sector's debacle and the near inconceivability of it all here exactly two months ago, in an entry entitled "Malaise on Steroids."  Let's continue a look at two tracking exchange-traded funds (ETFs).  As now, our question was: how can the capitalist system survive the implications of the graphs at right?

ProShares Ultra & Ultra-Short Financials
The graphs at the right represent weekly-period charts of the ProShares Ultra (symbol UYG) and Ultra-Short (symbol (SKF) Financials ETFs from the instruments' inception in February 2007 through the dateline of this article upon the inauguration of Barack Obama as the 44th President of the United States.  These ETFs attempt to produce double the volatility that the underlying stocks would generate on their own.  The evil-twin Ultra-Short SKF fund is designed to attempt achieving the inverse, or short, volatility of its long brother ETF.  That is, when bank stocks go down, SKF goes up (with twice the slope).

SKF (click on the second thumbnail to the right for larger image) manifests an even wilder aberrational trend than does UYG. It no longer looks like an inverse image, as it is touted to be.  On the first trading day of the current year, SKF opened at $104.00 and closed nearly exactly two dollars lower at $102.05.  On the date of the last entry about it on these pages two months ago this day, the ETF was at its all-time closing high of $262.45, and would move above $300 intraday the next day before settling lower.  Only two weeks and two days before that, on the day of the U.S. General Election of 4 November 2008, SKF closed at $110.73.  Today, it soared nearly 29% to touch exactly $200.00 intraday and closed at $199.43.

The mirror-image long financials tracking fund, which, last we checked on these pages, had fallen to $3.62 at its intraday and historical nadir on the 20^th of November, 2008, and which was at $10.93 at the close of election day early last November, today crashed well below $3 to a worst-ever closing low of $2.73.  The close was also the intraday low.

For comparison's sake, at the end of the 3rd quarter of 2008, on September 30^th, the UYG Financials Ultra ETF sat at $17.54.  The closing high of the previous 52 weeks was $48.50 on December 10^th, 2007.  — Dallman Ross